Allianz subsidiary pleads guilty to $7 billion investment implosion.

German insurer Allianz will pay more than $6 billion for the implosion of a hedge fund group two years ago that hit public pensions, religious organizations, foundations and other investors with heavy losses.

A US subsidiary of the insurer, Allianz Global Investors US, pleaded guilty Tuesday to securities fraud for failing to stop the scheme, which came to light after funds collapsed early in the pandemic, losing more than $7,000. million before they were shut down, according to court filings by federal prosecutors.

The fraud involved three former portfolio managers, including the funds’ former chief investment officer, who misled investors for at least four years by hiding the risk they faced, prosecutors said. Gregoire Tournant, a former chief investment officer, tried to cover up the scheme and mislead investigators in the spring of 2020, prosecutors said.

Mr. Tournant was charged with fraud and obstruction of justice in an indictment unsealed Tuesday. The other portfolio managers, Stephen Bond-Nelson and Trevor Taylor, pleaded guilty in March and are cooperating with the government, prosecutors said.

Damian Williams, US Attorney for the Southern District of New York in Manhattan, said the three men provided investors with false documents that “disguised the fact that they were secretly exposing investors to substantial risk.”

Those investors included various pension funds: the Teamster Members Retirement Plan, the New England Health Care Employees Pension Fund, the Arkansas Teachers Retirement System, the City of Milwaukee Employees Retirement System and the Blue Cross Blue Shield National Employee Benefits Committee. Under its plea agreement, Allianz said it would pay more than $5 billion in restitution to investors and more than $1 billion to the government, federal officials said.

But the consequences of the case go beyond the affected investors. As a result of his guilty plea, Allianz said he would no longer be allowed to advise certain types of funds in the United States. The company said on Tuesday that it had reached a preliminary agreement to transfer the management of approximately $120 billion in assets to a new partner, Voya Financial. Allianz said a deal would be finalized in the coming weeks.

Allianz, which is the parent company of giant mutual fund bond firm PIMCO, said it did not expect its other US operations to be disrupted. Allianz said it hoped to obtain a waiver from the Securities and Exchange Commission that would ensure the guilty plea would not affect PIMCO’s operation or Allianz’s insurance business in the United States.

“We accept our corporate responsibility for the isolated but serious wrongdoing of these three former employees,” Allianz said in a statement. The firm said it supported investigators’ efforts and tried to reach “fair settlements” with clients who had been lied to.

A lawyer for Allianz’s investment subsidiary pleaded guilty on his behalf Tuesday afternoon. A statement of facts included in the plea documents said that he had “made false and misleading statements to current and prospective investors that materially underestimated the risks being assumed by the funds.”

The DOJ and the SEC began examining the company’s Structured Alpha Funds after they suffered heavy losses at the start of the Covid-19 pandemic, as share prices plummeted as lockdowns caused widespread economic turmoil. . Authorities said the seeds of that destruction were planted years earlier by fund managers who fabricated risk reports, doctored performance data and manipulated spreadsheets to lie about their investment strategy.

Prosecutors exposed a series of attempts to mislead investors. In one case, officials said, portfolio managers reported a 9.3 percent daily loss, halving the actual decline. In another, portfolio managers told investors that a potential market crash would lead to losses of 4.15%, a figure that is down one digit from the actual estimate of 42.15%.

Investigators said the managers began misleading investors as early as 2016, helping the company generate $400 million in net profit by managing the funds, as well as large bonuses for themselves.

“The defendants’ conduct in this case was brazen,” said Gurbir S. Grewal, director of the SEC’s enforcement division.

Still, officials said, the investment firm’s oversight was too weak to spot the problem before it was too late: The firm’s controls were riddled with holes that made them inadequate to monitor managers’ operations.

After the funds were separated, investigators said, the cover-up began.

Mr. Grewal said that when SEC staff members confronted Mr. Bond-Nelson about a false statement he had made, he took a bathroom break and never returned. And Taylor met with Tournant at a vacant construction site to discuss how to answer investigators’ questions, authorities said.

Mr. Tournant, 55, voluntarily surrendered to Denver authorities Tuesday morning to face charges including securities fraud, conspiracy and obstruction of justice. In a statement, Tournant’s attorneys, Daniel Alonso and Seth Levine, called the case a “meritless and ill-considered attempt by the government to criminalize the impact of March 2020’s unprecedented Covid-induced market dislocation.” .

Lawyers said Tournant was on medical leave at the time and had suffered losses from the “considerable investment” he had made in the fund.

“While the losses are unfortunate, they are not the result of any crime,” the attorneys said.

In addition to his criminal case, Mr. Tournant faces civil charges from the SEC, which has already settled with Mr. Bond-Nelson and Mr. Taylor.

“Victims of this misconduct include teachers, clergymen, bus drivers and engineers, whose pensions are invested in institutional funds to support their retirement,” said SEC Chairman Gary Gensler. “This case demonstrates once again that even the most sophisticated institutional investors, such as pension funds, can become victims of wrongdoing.”

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